Fundamentals of Accounting
Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur. True False
True
Cost of goods sold is the total product cost of the units sold during a period. True False
True Rationale: Cost of goods sold represents the cost of goods that were sold during the period and, therefore, transferred from finished goods inventory on the balance sheet to cost of goods sold on the income statement.
What is the name for a person who lends funds to a business entity and expects repayment with interest? proprietor stockholder creditor owner
Creditor
Which of the following is one of the elements of stockholders' equity? retained earnings dividends payable net income loss on the sale of equipment
retained earnings
A company that sells merchandise to customers should normally recognize revenue and the related expenses in the period the revenue earned, whether payment is received or not. revenue only after the cash is collected. expenses in the period the merchandise is sold and revenue in the following period. both revenue and expenses in the period following sale.
revenue and the related expenses in the period the revenue earned, whether payment is received or not.
Plant assets are depreciated because the accrual basis of accounting requires matching of costs to revenues. cash basis of accounting requires depreciation. the book values equal market values. the replacement cost of plant assets may fluctuate over time.
the accrual basis of accounting requires matching of costs to revenues.
Depreciation is a process by which replacement funds are accumulated for plant and equipment. the decline in market value of plant and equipment is determined and recorded. the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset. the difference between current market value and historical cost of plant and equipment.
the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset.
Which one of the following is an internal user of financial information? governments investors company management creditors
Company management
Atlas Inc. manufactures television sets. Last month, direct materials (electronic components, etc.) costing $550,000 were put into production. Direct labor of $880,000 was incurred, manufacturing overhead equaled $495,000, and selling and administrative costs totaled $396,000. The company manufactured 8,400 television sets during the month. Assume that there were no beginning or ending work-in-process balances. What was the total product cost for last month? $2,110,000 $1,925,000 $1,300,000 $1,250,000
$1,925,000 Rationale: SUPPORTING CALCULATIONS: Total product cost = Direct materials + Direct labor + Manufacturing overhead $550,000 + $880,000 + $495,000 = $1,925,000
Eli Company Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2019. Refer to the information provided for Eli Company. If the customer pays the amount of the invoice for its purchase on March 14, 2019, how much cash will Eli Company receive? $1,800 $1,980 $1,400 $2,000
$1,980
The statement of stockholders' equity shows an $8,000 increase in the common stock account, a $22,000 increase in the paid-in capital in excess of par--common stock account, and a $100,000 increase in retained earnings. If the common stock has a par value of $3 and dividends of $10,000 were declared and paid during the year, what is the amount of net income for the year? $140,000 $90,000 $110,000 $100,000
$110,000 Rationale: $100,000 increase in retained earnings + $10,000 dividends = $110,000
LaFarge North AmericaThe following information relates to this company's stockholders' equity accounts: Common Stock, $7 par, 200,000 shares authorized $700,000 Paid-in Capital in Excess of Par--Common Stock 160,000 Retained Earnings ?? Treasury Stock, 2,000 shares at cost 15,000 Total Stockholders' Equity $975,000 Refer to LaFarge North America. What is the amount of retained earnings? $ 98,000 $130,000 $114,000 $860,000
$130,000 Rationale: $975,000 total + $15,000 treasury stock − $700,000 common stock − $160,000 paid-in capital = $130,000
A company's employees earn $5,000 per day, work 5 days per week (Monday through Friday), and get paid each Friday. If the previous payday was January 26 and the accounting period ends on January 31, what is the ending balance in the wages payable account? $15,000 $10,000 $ 9,000 $25,000
$15,000 Rationale: Previous Payday was Friday, January 26th. Therefore, Monday is January 29th, so three days before month end. $5,000 × 3 days = $15,000
The King Corporation manufactures custom-made furniture. The following data pertain to Job X4A: Direct materials placed into production $9,000 Direct labor hours worked 300 hours Direct labor rate per hour $15 Machine hours worked 100 hours Plantwide overhead rate is $22.50 per machine hour. One half of Job X4A was sold for $10,000. What is the total amount of costs assigned to Job X4A? $9,000 $15,750 $20,250 $13,500
$15,750 Rationale: SUPPORTING CALCULATIONS: $9,000 + ($15 × 300) + ($22.50 × 100) = $15,750
Focal Point Engineering purchased a trademark at the beginning of the year for $200,000. Although the trademark's legal life is 20 years, economic benefits were expected for only 10 years. Also, during the year, the company incurred research and development costs of $200,000. The book value of the trademark at the end of the year, is $200,000. $180,000. $175,000. $280,000.
$180,000. Rationale: $200,000 − ($200,000 / 10) = $180,000
A company purchased a patent for $100,000 at the beginning of the current year which it believes has an expected useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense should be recorded in the current year? $0 $5,000 $20,000 $100,000
$20,000 Rationale: $100,000 / 5 = $20,000
Carlson Company uses a predetermined rate to apply overhead. At the beginning of the year, Carlson estimated its overhead costs at $240,000, direct labor hours at 40,000, and machine hours at 10,000. Actual overhead costs incurred were $249,280, actual direct labor hours were 41,000, and actual machine hours were 11,000. If the predetermined overhead rate is based on machine hours, what will be the total amount credited to the plantwide overhead account for the year for Carlson? $240,000 $246,000 $264,000 $249,280
$264,000 Rationale: SUPPORTING CALCULATIONS: $240,000 / 10,000 = $24 $24 × 11,000 = $264,000
Learner Company sells its product for $100. It has a variable cost ratio of 70% and total fixed costs of $9,000. What is the break-even point in sales dollars for Learner Company? $32,000 $30,000 $8,000 $12,858
$30,000 Rationale: SUPPORTING CALCULATIONS: 1 − Variable cost ratio = Contribution margin ratio Contribution margin ratio = 1 − 0.70 = 0.30 Break-even sales dollars =Total fixed cost / Contribution margin ratio Break-even sales dollars = $9,000 / 0.30 = $30,000
A particular balance sheet includes the following information within the stockholders' equity section: Common stock, $5 par value $ 300,000 Paid-in capital in excess of par 1,740,000 Assume that common stock is the only class of stock that has been issued and that there have been two issues of stock since the corporation began business. What is the average issue price per share of stock? $ 6.80 $29.00 $34.00 $ 5.00
$34.00 Rationale: $300,000 total common stock / $5 par = 60,000 share issued ($300,000 + 1,740,000) total capital stock / 60,000 shares = $34 average price per share.
A company provided the following data: Sales $540,000 Variable costs $378,000 Fixed costs $120,000 Expected production and sales in units 40,000 units What is the break-even point in sales dollars? $150,000 $171,429 $112,500 $400,000 $498,000
$400,000 Rationale: Contribution margin ratio = ($540,000 − $378,000) / $540,000 = 30% Break-even point = $120,000 / 30% = $400,000
Planet Company sells a product for $16 per unit, variable cost is $12 per unit, and the total fixed cost is $6,000. What is the break-even point in units? 1,700 units 375 units 1,210 units 1,500 units 500 units
1,500 units Rationale: Unit contribution margin = Price − Unit variable cost Unit contribution margin = $16 − $12 = $4 Break-even units = Total fixed cost / Unit contribution margin Break-even units = $6,000 / $4 = 1,500 units
Hill & Scott Company sells a product for $20. The variable costs are $15 per unit, and the total fixed costs are $7,000. How many units must be sold by Hill & Scott to earn a profit of $1,000? 62 units 247 units 1,040 units 1,400 units 1,600 units
1,600 units Rationale: Number of units to earn target income = (Total fixed cost + Target income) / Contribution margin per unit Unit contribution margin = Price − Unit variable cost = ($20 − $15) = $5 Number of units to earn target income = ($7,000 + $1000) / $5 = 1,600 units
Total stockholders' equity includes $50,000 of common stock with a stated value of $0.50, and 5,000 shares of treasury stock with a total cost of $25,000. How many total shares are outstanding? 150,000 95,000 105,000 100,000
100,000 Rationale: ($50,000 / $.50) = 100,000 shares of common stock issued − 5,000 shares of treasury stock = 95,000 shares
Elwood Company makes a product with the following unit costs: Direct materials $2.00 Direct labor 0.90 Variable overhead 0.30 Variable marketing expense 0.40 The fixed overhead totaled $26,000, and the fixed selling and administrative expense totaled $35,600. The price per unit is $9. How many units must be sold by Elwood to achieve a targeted income of $41,000? 17,111 19,000 28,500 4,814 11,000
19,000 Rationale: ($26,000 + $35,600 + $41,000) / $5.40 = 19,000
The stockholders' equity section of a balance sheet at December 31 is provided below: Common stock, $0.50 par value $10,000 Paid-in capital in excess of par--common stock 40,000 Total capital stock 50,000 Retained earnings 25,000 Less: Treasury stock (at cost, $20 per share) < 2,000> Total Stockholders' Equity $73,000 How many shares of stock are issued? 20,200 19,800 20,000 18,000
20,000 Rationale: ($10,000 / $0.50 par) = 20,000 shares of common stock issued
A company provided the following data: Selling price per unit $ 60 Variable cost per unit 40 Total fixed costs 400,000 How many units must be sold to earn a profit of $40,000? 23,333 8,500 22,000 2,000 20,000
22,000 Rationale: ($400,000 + $40,000) / ($60 per unit − $40 per unit) = 22,000 units
Assume the following information: Selling price per unit $200 Contribution margin ratio 0.50 Total fixed costs $275,000 How many units must be sold to generate a profit of $50,000? 3,250 units 4,000 units 2,750 units 2,500 units
3,250 units Rationale: SUPPORTING CALCULATIONS: Contribution per unit = (Selling price per unit × Contribution margin ratio) = ($200 × 0.50) Contribution per unit = $100 Number of units to earn target income = (Total fixed cost + Target income) / Contribution margin per unit Number of units to earn target income = ($275,000 + $50,000) / $100 Number of units to earn target income = 3,250 units
Parlato Corp. has an inventory turnover rate of 8 times. Calculate the company's average days to sell inventory. 120 1,200 45.625 150
45.625
Arthur Company sells a product for $14 per unit. The per-unit variable cost is $4 and the total fixed cost is $38,000. How many units must Arthur sell to earn an operating income of $12,000? 2,600 12,500 5,000 3,800 9,500
5,000 Rationale: Contribution margin = $14 − $4 = $10 Units for target income = ($38,000 + $12,000) / $10 = 5,000 units
Pauley Company provides home health care. Pauley charges $35 per hour for the professional care. The variable costs are $21 per hour and the fixed costs are $78,000. Next year, Pauley would like to earn an operating income of $37,500. How many hours of the professional care must Pauley provide to achieve the target income? 5,571 hours 3,714 hours 2,679 hours 8,250 hours 5,500 hours
8,250 hours Rationale: $35 − $21 = $14 ($78,000 + $37,500) / $14 = 8,250 hours
Which of the following statements is true of financial accounting? Financial accounting is subject to externally imposed rules. All of these statements are correct. Financial accounting provides information that can be objectively verified and audited. Financial accounting is directed toward external users.
All of these statements are correct. Rationale: Financial accounting is primarily concerned with producing financial statements for external users, including investors, creditors, customers, suppliers, and government agencies. Financial statements must conform to certain rules and conventions that are defined by various agencies, such as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB).
Which one of the following is a correct fundamental accounting equation? Assets + Stockholders' Equity = Liabilities Assets + Retained Earnings = Stockholders' Equity Assets = Liabilities + Stockholders' Equity Assets + Liabilities = Stockholders' Equity
Assets = Liabilities + Stockholders' Equity
Which one of the following financial statements show the end of the year cash balance for a business entity? Statement of Retained Earnings and Statement of Cash Flows Balance Sheet and Statement of Cash Flows Balance Sheet and Statement of Retained Earnings Income Statement and Statement of Retained Earnings
Balance Sheet and Statement of Cash Flows
What is the name of the branch of accounting concerned with providing outside decision makers with information to assess the amounts, timing and uncertainties of the company's future cash flows? auditing managerial accounting bookkeeping financial accounting
Financial accounting
What should a company do to improve its accounts receivable turnover rate? Reduce the number of employees working in the credit department. Increase its sales force. Give customers credit terms of 2/10, n/30 rather than 1/10, n/30. Lower its selling prices.
Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.
Which statement summarizes the results of the company's operations? Balance Sheet Statement of Retained Earnings Statement of Cash Flows Income Statement
Income Statement (also know as operations statement)
Synergy Company expects the following results for the next accounting period: Sales $250,000 Variable costs $150,000 Fixed costs $ 50,000 Expected production and sales in units 3,500 units The sales manager believes that sales could be increased by 500 units if advertising expenditures were increased by $14,000. Which of the following is the effect on the operating income if an increase in the advertising expenditures results in an increase in sales by 500 units? (Note: Round the sale price per unit and the variable cost per unit to two decimal places.) Increase of $220 Increase of $575 Increase of $345 Increase of $280 Increase of $450
Increase of $280 Rationale: Selling price = Sales / Units sold = $250,000 / 3,500 units = $71.43 Variable cost per unit = Variable cost / Units produced = $150,000 / 3,500 units = $42.86 Operating income prior to the change in advertising expenditures = (Sales − Variable cost − Fixed costs) = ($250,000 − $150,000 − $50,000) = $50,000 Operating income after the change in sales volume = (Sales − Variable cost − Fixed costs) = {[$71.43 × (3500 + 500)] − [$42.86 × (3500 + 500)] − $64,000} = $285,720 − $171,440 − $64,000 = $50,280 Change in operating income = ($50,280 − $50,000) = $280 (Increase)
Which of the following situations violates the matching principle during 2019 for a real estate company that pays its agents on commission? Sales commissions paid in 2019 for 2020 commissions are recorded as prepaid expenses for 2019. Sales commissions are charged to expense in 2019 on all sales made in 2019 even though some of the commissions have not been paid. Wages expense is recognized in 2019 even though payday is not until sometime in 2020. Insurance expense is recognized for the total cost of a 1-year policy purchased in July 2019.
Insurance expense is recognized for the total cost of a 1-year policy purchased in July 2019.
Which of the following is true of a mixed cost? It does not change with a change in the level of output. All of these are correct. It contains both a fixed and a variable component. It cannot be separated into fixed and variable components.
It contains both a fixed and a variable component. Rationale: Mixed costs are costs that have both a fixed and a variable component. The formula for a mixed cost is as follows: Total cost = Total fixed cost + Total variable cost
Which of the following statements is false regarding the reason that inventory costs are recorded as expenses when sold rather than when incurred? It gives the user's of the company's financial statements a clearer picture of profitability. It helps the company achieve a better matching of expenses with related revenues. It gives the company's accounting personnel more time to record inventory transactions. Inventory is an asset at the time it is acquired.
It gives the company's accounting personnel more time to record inventory transactions.
Which of the following statements regarding liabilities is true? The accounting principles followed in the U.S. require that current liabilities be listed in order of decreasing amounts on the balance sheet. Liabilities must be legally enforceable to a known recipient. The accounting principles followed in the U.S. differ substantially from those of other countries, especially with respect to current liabilities. Liabilities arise from past activities that require some future sacrifice of economic benefits.
Liabilities arise from past activities that require some future sacrifice of economic benefits.
When is revenue from the sale of merchandise normally recognized? On the date the customer pays for the merchandise. When the merchandise is sold, if sold for cash, or when payment is received, if sold on credit. Either on the date on which the sale occurs, or the date on which the customer pays. On the date the sale is made.
On the date the sale is made.
Suppose a corporation issues 5,000 shares of $1 par common stock for $30 per share. In addition to the increase in cash, what effect does this transaction have on the accounting equation? Gain on stock issuance increases $145,000. Paid-in capital in excess of par increases $145,000. Retained earnings increases $150,000. Common stock increases $150,000.
Paid-in capital in excess of par increases $145,000.
Which one of the following is an example of a deferred revenue? Sales are made to customers on credit. Revenue has been earned but not yet recorded. Cash sales are made to customers. Payments are received prior to providing the services to customers.
Payments are received prior to providing the services to customers.
On October 1, 2019, a company paid $9,000 rent in advance. The rent per month is $1,000. Assuming the company's accounting period ends on December 31, 2019, what will be reported on the financial statements? Prepaid Rent of $9,000 on its balance sheet at December 31, 2019 Rent Revenue of $6,000 on its 2019 income statement Rent Expense of $9,000 on its 2019 income statement Prepaid Rent of $6,000 on its balance sheet at December 31, 2019
Prepaid Rent of $6,000 on its balance sheet at December 31, 2019
The three main business activities are financing, operating, and investing. True False
True
Which statement presents financial information not based on accrual accounting? Statement of Cash Flows Balance Sheet Income Statement Statement of Retained Earnings
Statement of Cash Flows
When a corporation decides whether to pay a cash dividend, which of the following is an important consideration? The balances in the corporation's cash and retained earnings accounts. The balance of paid-in capital in excess of par on the corporation's stock accounts. The number of authorized shares of the corporation's stock. The book value of the corporation's stock.
The balances in the corporation's cash and retained earnings accounts.
Canterbury Cycles sells Harleys and pays each salesperson a commission of $800 for each cycle sold. During the month of December, a salesperson sold 3 cycles. The company pays commissions on the 5th day of the month following the sale. Which of the following statements is true? The salesperson will recognize revenue in the same month that the cycle dealer recognizes expense. The salesperson will recognize commission expense in the amount of $2,400 in January. The salesperson will recognize commission revenue earned in the amount of $2,400 in December. The company will recognize commission expense in the amount of $2,400 in December.
The company will recognize commission expense in the amount of $2,400 in December.
Bennett Motors is facing the following business decisions. Which decision will least likely require financial information? The labor union representing the company's employees is negotiating a pay raise as part of a new labor agreement. A local bank is reviewing the company's loan application. The company's management is deciding whether to detail its vehicles today or tomorrow. The company is attempting to sell its stock to the public.
The company's management is deciding whether to detail its vehicles today or tomorrow.
How are cash equivalents reported or disclosed in the financial statements? They are only reported on the statement of cash flows. They are only disclosed in the notes to the financial statements. They are included with short-term investments as a current asset on the balance sheet. They are included with cash as a current asset on the balance sheet.
They are included with cash as a current asset on the balance sheet.
An example of a current liability is the current maturity of a long-term debt. True False
True
Employers withhold taxes from their employees' gross pay and later pay these amounts withheld to the taxing authority.
True
For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit. True False
True
Most companies use the accrual basis of accounting because it is required under generally accepted accounting principles. True False
True
Sales taxes collected from customers should be recorded in a liability account until the cash is passed along to the taxing authority. True False
True
The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable. True False
True
The proceeds from advance ticket sales for a concert to be held next month should be recorded as a current liability (unearned revenue).
True
Under accrual accounting when is revenue recognized? When cash is received, and expenses when the costs are incurred. When earned, and expenses when incurred. When earned, and expenses when cash is paid. When cash is received, and expenses when cash is paid
When earned, and expenses when incurred.
An addition to employee compensation whereby the corporation provides a right to purchase stock at a set price is called the conversion privilege. treasury stock. a call option. a stock option.
a stock option
The balance in the retained earnings account represents accumulated earnings that have not been distributed to stockholders. accumulated revenues from all prior years of operations. the amount of cash available for dividends. cash in the bank.
accumulated earnings that have not been distributed to stockholders.
Depreciation is an effort to achieve proper matching of the cost of operating assets with related revenues. an accumulation of funds to replace the related plant asset. the difference between the original cost and salvage value of an asset. the cash allocated each period to maintain a plant asset.
an effort to achieve proper matching of the cost of operating assets with related revenues.
Goodwill can be recorded as an asset when a(n) business has above normal profitability compared to other businesses in its industry. business can determine that it has created customer goodwill and name recognition. offer is received to purchase the business at a price in excess of the value of the assets. business is purchased and payment is made in excess of the value of the net assets.
business is purchased and payment is made in excess of the value of the net assets.
Which of the following is not a form of a business entity? partnership corporation cooperative sole proprietorship
cooperative
Which of the following accounts would most likely appear on the income statement of a merchandise company, but not on the income statement of a service company? cost of goods sold administrative expenses income tax expense selling expenses
cost of goods sold
The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as administrative expenses. sales revenue. operating expenses. cost of goods sold.
cost of goods sold.
The payment of Accounts Payable results in a(n) increase in liabilities and decrease in stockholders' equity. decrease in liabilities and increase in assets. decrease in both liabilities and assets (cash). decrease in liabilities and increase in stockholders' equity.
decrease in both liabilities and assets (cash).
Product costs consist of: indirect materials, indirect labor, and administrative costs. design and advertising costs. direct materials, direct labor, and selling costs. direct materials, direct labor, and manufacturing overhead.
direct materials, direct labor, and manufacturing overhead. Rationale: Product costs are classified as direct materials, direct labor, and manufacturing overhead, which are the three cost elements that can be assigned to products for external financial reporting.
Generally accepted accounting principles (GAAP) require that research and development costs to develop a new product be capitalized in the patents account. expensed in the period incurred. capitalized in the research and development costs account. amortized over the expected economic life of the new product.
expensed in the period incurred.
Which of the following is an intangible asset? oil goodwill retained earnings accounts receivable
goodwill
Expenses should be matched against revenue before the earnings process is complete. after payment has been made for any costs related to the revenue. only after cash is collected from the customer. in the same period as the revenue that they helped generate.
in the same period as the revenue that they helped generate.
Operating assets with no physical properties are called current assets. intangible assets. plant assets. property, plant, and equipment.
intangible assets
Product costs pertaining to the units that are not sold yet are reported as: costs of goods sold on the balance sheet. administrative costs on the income statement. inventory on the balance sheet. selling expenses on the income statement.
inventory on the balance sheet. Rationale: Product costs initially are added to an inventory account and remain in inventory until the product is sold, at which time they are transferred to cost of goods sold (COGS).
Which one of the following is not one of the three business activities? investing financing measuring operating
measuring
Which of the following is not classified as a current liability account? income taxes payable accounts payable salaries and wages payable note payable, due in 2 years
note payable, due in 2 years
Long-term debt generally includes obligations that extend beyond one year. obligations that will be satisfied within one year. accrued expenses. accounts payable, because they are interest-bearing.
obligations that extend beyond one year.
The primary objective of managerial accounting is: to provide the Internal Revenue Service with financial and nonfinancial information about the taxable income of an organization. to produce financial information that must comply with various accounting standards. to provide management with financial and nonfinancial information useful in planning, controlling, and decision making. to produce information for external users, including investors, creditors, customers, suppliers, and government agencies.
to provide management with financial and nonfinancial information useful in planning, controlling, and decision making. Rationale: Managerial accounting identifies, collects, measures, classifies, and reports financial and nonfinancial information that is useful to internal users in planning, controlling, and decision making.
Product costs are expensed: when the product is sold. all of these are correct. when the product is finished. when the product unit cost is calculated.
when the product is sold. Rationale: Product costs are initially put into inventory. They become expenses only when the products are sold, which matches the expenses of manufacturing the product to the sales revenue generated by the product at the time it is sold.
Land is not depreciated because it appreciates in value. does not have an established depreciable life. has a useful life that is limited to the period of time a company is in business will provide future benefits for a company for an unlimited period of time.
will provide future benefits for a company for an unlimited period of time.
A current liability includes obligations which must be repaid within one year or within the operating cycle, whichever is longer. by the end of the operating cycle. within one year. within one year or within the operating cycle, whichever is shorter.
within one year or within the operating cycle, whichever is longer.